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Question from Past Microeconomics Qualifying ExamEdit

Fall 2005 - Section I, Question seven, George Mason University

T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

Suppose an increase in dishonest behavior by some lawyers causes the legal profession to have a poorer reputation, less prestige and providing all lawyers with lower non-pecuniary satisfaction than before. This reduction in prestige will lead to an increase in lawyers’ salaries exactly offsetting the monetary value of the lost non-pecuniary satisfaction.

AnswerEdit

Uncertain. It is possible that the dishonest behavior by some of the lawyers actually leads to higher income than before, offsetting some of the non-pecuniary losses. If an employer wanted to hire the same number of lawyers as before the change, the salaries of lawyers would have to be increased to a degree that the total value would be equivalent to what it was prior to the dishonest behavior.


Alternative False; The dishonest lawyers will be rewarded for their actions (otherwise why would they persist?). The dishonest lawyers will not be building a reputation, therefore lawyers in general will suffer from reputation loss. These are the more short-term oriented lawyers. The lawyers who are honest will invest in reputation building for honesty (if the market values this). The costs of this reputation building of honest lawyers is non-zero. The total compensation might go back to the original level, but the costs of signaling are higher. This is a tragedy of the commons. --Mthomas1776 14:16, 6 August 2006 (UTC)
Another alternative Uncertain: the loss of reputation can be seen as a shift left in the lawyer supply curve (or perhaps a reorienting of Supply if not all lawyers value reputation in the same way). If the demand for lawyers is perfectly inelastic, then the wage will increase by exactly the compensating amount. Otherwise wages will increase some, but the quantity of Lawyer hours will decrease as well.

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